CEOs words can predict the future

2007

Every investor would love to have a crystal ball that forecast a company's performance. But as far as the predicting the future innovations of firms, researchers believe they are able to do just that.

According to Jaideep Prabhu, professor of marketing strategy at Tanaka Business School, Imperial College London, the answer lies in the words of the CEO.

Just listening carefully to the words used by a CEO and counting the number of future-oriented sentences in annual reports, he says he can predict future innovation by the firm.

In the paper "Managing the Future: CEO Attention and Innovation Outcomes," published in the October 2007 edition of the Journal of Marketing, Professor Prabhu and co-authors Rajesh Chandy at the University of Minnesota and Manjit S. Yadav of Texas A&M University, suggest that CEOs who focus their attention on future events, as well as external activities, tend to lead their firms to earlier adoption and invention of new technologies and greater and faster development of innovations.

In contrast, CEOs who devote more attention to the internal operations tend to preside over organisations that are slower to acknowledge, adopt or implement new technologies.

Thus, the researchers argue, it is the words, not just actions, of a CEO that set the tone to inspire, propel, and motivate innovation by employees in a firm.

To investigate their theory, Professor Prabhu and his co-authors studied empirical data collected from the online banking industry over eight years to determine innovation outcomes such as speed of detection, speed of development and the breadth of deployment of technology.

By counting the number of future-oriented phrases and words in letters to shareholders over this time span, they were able to predict the level of innovation by the firm up to five years later.

"The day to day pressures from inside the corporation tend to take up the bulk of the CEO's time, overwhelming their attention spans," explains Professor Prabhu.

"But because the CEO sets the tone and culture, not thinking forward and outside of the firm has major negative consequences for innovation."

In other words, he says, CEOs really ought to direct their attention outside the firm rather than toward internal problems. Those are better left for others to figure out.

"The temptation to focus on fires within the firm may cause you to take your eyes off of your job," Professor Prabhu added.

"A CEO who focuses on the big picture, not the nitty-gritty, will influence the process of innovation and future outcomes of the firm more than one who has an internal day to day focus."